Another Symptom of the Housing Bubble

July 26th, 2011 at 6:41 am

When we think of the damage wrought by the bursting of the housing bubble, we tend to think of the Great Recession and the broad damage to jobs and incomes.  But there’s another dimension that’s less appreciated: wealth destruction, especially for minority households.

A new study out today from the Pew Research Center shows some pretty shocking losses in net worth.  That’s a much broader concept than income, including family assets minus liabilities.

For many middle-class households, and especially for minorities, their main asset is not their stock or bond portfolios…it’s their home.  And when its value plummets—or when they lose it—well, the result is in the chart below.

Between the mid-2000s and 2009, median white net worth fell about 16%, from around $135K to $113K (in 2009 $).  But black and Hispanic wealth was decimated, falling by over half for blacks and two-thirds for Hispanics.

Surely, some of that wealth, I’d guess a non-trivial share, was a result of the bubble itself, along with the financial practices, like bad underwriting, that inflated it.  But there’s no getting around that this is a major backslide for minority households, and it will take years, if not decades, for them to climb back.

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7 comments in reply to "Another Symptom of the Housing Bubble"

  1. Dan says:

    Error in the post: you say “median white net worth fell about 16%, from around $135K to $133K”. The chart says $135K to $113K (which fits with the 16%).

  2. readerOfTeaLeaves says:

    There’s a larger, much-needed conversation in the US that has not happened. It revolves around some related, somewhat amorphous topics:
    — campaign finance: mortgage bankers, builders, and commercial property owners get tax write-offs to pay what appear to be largely unlimited funds into PACs that are then spent to fund judicial, local, state, and federal campaigns. This is pretty much the ‘McMansion building’ part of the economic sector continuing to control the policy process and underwrite more sprawl and strip malls.

    — household economics: looking at average US wages, fewer and fewer people can afford McMansions (yet those houses are the most profitable for builders, as a general rule). What is most profitable for builders is too expensive for the average buyer.

    — misinformation to buyers: overly complex contracts, and their role in creating a great deal of (fraudulent) ‘wealth’ has become more and more clear as we’ve seen some members of Congress go after Prof Warren for her efforts to try and improve the clarity of contracts. Why is she such a threat…? (Okay, rhetorical question.)

    — lenders are absolved of financial responsibility: the mortgages are given for 15 and 30 year loans, they are then securitized; which means the lenders have zero responsibility to ensure the buyers can/will actually pay back the loans — a process that degraded lending criteria at the local level. In other words, we had systemic fraud but no one ever speaks of that publicly. (I suspect it would be a more stable economic model to simply allow pension funds to employ skilled, accountable realtors, builders, and remodelers and then control the mortgages — it would remove the securitization step and the pension funds would have predictable revenue. Remove the banks from the entire process, as they’ve proven themselves untrustworthy. The pension funds can hold the mortgage notes, employ excellent realtors, employ the builders directly… and then all parties to the housing mortgage revenue stream are accountable to the pension fund, which would have far more clarity over the quality of its assets than under the current bank-securitization-Wall-Street -no-one-is-accountable model.)

    — lack of meaningful energy or environmental standards for mortgages: the mortgages are not tied to any kind of ‘energy performance’ criteria. In other words, a ‘smart policy’ would state that the fed gov’t will **only** back mortgages if housing meets ‘X energy efficiency’ criteria. (Requiring better energy standards would create jobs for renovations, and more energy-efficient building codes in new – and remodeled – housing stock.) Requiring ‘energy standards’ that actually mean something as a basis for Fannie or Freddie backing mortgage loans could then ‘incentivize’ lower mortgage rates for homes or condos in ‘walkable’ neighborhoods — i.e., a .5% lower interest rate for a specific measurable rate of reduced auto use, plus another .5% lower for solar design… you get the idea.

    The ‘performance parameters’ would have to be measurable, but today we pretty much let Joe Schmoe go build a crap subdivision and there are no standards whatsoever for the sprawling mess that US taxpayers underwrite via Fannie and Freddie; in the housing sector, we appear to underwrite and incentivize increasing levels of inefficiencies (economically, environmentally, agriculturally…)

    The housing mess is symptomatic of a culture that is so individualistic — and has handed itself to the sleaziest, most short-term ‘transactional’ mentality — that it is driving economic and environmental disasters all over the US. These same interests fund judicial campaigns and buy legislators, thereby compounding the problem over time. However, the ‘rugged individualist’ mythos is very strong among [some] subdivision builders and some sectors of the real estate market (i.e., ‘free markets’ are Holy Writ). They assume ‘pay to play’ is the political criteria.

    The sad outcome is that some of these folks are quite talented; currently, they’re subject to boom-and-bust cycles that are the direct outcome of their ‘free market’ beliefs.

    There are ways to address the problems with housing, but they’d require ‘performance parameters’ for energy, transportation, ‘livability factors’, and impact on public infrastructure before the feds agreed to back the mortgages.
    They’d also remove the banks from the mess they’ve made, and find a way to align assets with whoever benefits from the mortgages over time.
    That would require guts, vision, and leadership.

    What we do now is basically let the dumber, more aggressive market actors build housing that gives them a quick, short-term profit at the expense of society. Very short-sighted from a public policy view.

    Sorry, Dr. B, but obviously this is a real hot-button for me.
    My once-lovely neighborhood was overbuilt with government-subsizied McMansions and now about every 8th house is foreclosed. The way in which local and state governments let themselves be steamrolled, while Fannie and Freddie were backing this disaster with taxpayer funds, is a scandal.
    What has happened to public infrastructure is also a scandal, and the environmental impacts are literally criminal.

    If you can find time to read Michael Hudson’s “The Monsters”, I highly recommend it. The foreclosures are really only one thin layer of a hugely expensive mess that we’ve created by letting the private sector run roughshod over government at all levels. He focuses on fraud, which is a key piece of this whole problem.

    Watching what happened in my own region, and my own neighborhood, makes me so disgusted that -obviously – I spend part of each day on blogs, particularly finance related.

  3. Fred Donaldson says:

    Imagine the impact on a family with $6,000, when you cut SS by $500 a month. The couple might as well commit suicide as they approach their 60s and 70s. And how do they pay $10,000 a year for Medicare from 65 to 67?

  4. John S says:

    The main statistic being reported: “White households’ average worth is now 20X that of minorities” is pretty meaningless.

    Since many net worths are negative, overall average net worth for minorities is basically zero. So comparing the ratio of 113K to 5K is silly. Next year it might be 113K to $0 – will the headline then be “White households’ average worth is *infinitely* higher than that of minorities”?

  5. Michael says:

    And now we all know why conservatives want to reinflate the bubble.

  6. julian says:

    houses have gotten ridiculously expensive in Anaheim where I live, it’s gotta stop, and they’re still building more.